CNA Financial Corp (CNA) 2005 Q4 法說會逐字稿

Good morning, everyone. Welcome to CNA Financial Corporation's fourth quarter and year-end 2005 financial results conference call. This conference is being recorded and webcast. During the next few weeks, this call may be accessed again on CNA's website at www.cna.

With us this morning is Steve Lilienthal, CEO; Craig Mense, CFO; and Jim Lewis, President of P&C Operations.

During this call, there may be forward-looking statements made and references to non-GAAP financial measures. Please see the section of the earnings release, available on CNA's website, headed forward-looking statements with regard to those.

The forward-looking statements speak only as of today, February 16th, 2006. Further, CNA expressly disclaims any obligation to update or revise any forward-looking statements made during this call.

There will be time for questions from the investment community following the conclusion of CNA's remarks. Members of the news media may call Charlie Boesel at 312-822-2592 or Katrina Parker at 312-822-5167. And investment analyst questions may be directed to Cathleen Marine at 312-822-4159 or David Adams at 312-822-2183.

And now with that, I'll turn the conference over to Mr. Steve Lilienthal. Please go ahead, sir.

Thank you, operator, and good morning, everybody, and thank you for joining us today. 2005 was a year that started out quite quietly and grew noisy and increasingly more noisy as the year wore on. This description applies to the industry even more so than CNA.

We'll be covering a broad range of topics this morning, both in our prepared remarks and certainly in the Q&A, but when all is said and done there are several key points that we would like you to take away from this call.

First, the core property/casualty operation continues to perform well with sub-100 combined ratios, excluding catastrophes and commutations. Secondly, the speciality lines part-- segment of PC ops continues to perform as a market leader with excellent returns and standard lines has continued to show steady results. Both segments have demonstrated excellent underwriting discipline and are well positioned for the market going forward in 2006.

CNA's balance sheet is big and it is very strong. Significant progress has been made on the finite and corporate cover commutations, which has the dual effect of reducing our overall reinsurance receivables and enhancing future earnings.

Significant progress has and continues to be made on expense reduction and headcount reduction. Our catastrophic risk has been handled well from an exposure management, reinsurance structure and claims management standpoint.

We did take development in the quarter, primarily related to workers-- excess worker's compensation, pollution and CNA Re in the net amount of $139 million after tax. Total development in the quarter and the year is heavily impacted by the aforementioned commutations.

And lastly, Craig will discuss the impact of the correction for our prior account-- our prior accounting for discontinued operations.

Overall, I feel reasonably positive about 2005. We dealt with some tough issues while continue-- continuing to deliver solid underlying performance.

Let's talk about 2006 for a minute. We went into this year with a reasonable degree of optimism regarding our portfolio, distribution and infrastructure, both quantitatively and qualitatively.

Our emphasis for the year will be continuing the improvement in PC ops performance. Our focus will be on rational participation in the softening market and growth in the small business, middle market, property specialty lines and other targeted areas. We will continue to focus on an aggressive expense reduction effort. We will continue to focus on the risk associated with our runoff business and we will continue to make investments in our technology, claims platform and in our people.

I remain optimistic regarding our ability to deliver. Our performance to date, the product portfolio, distribution base and, ultimately, the quality of our people and business partners all position us for a solid year in 2006.

With that, let me turn it over to Craig.

Thanks, Steve, and good morning, everyone. I'd also like to start with a brief overview. Today we reported a net loss for the fourth quarter of $217 million and full-year net income of $264 million.

Our financial results were negatively affected by catastrophe losses, ceded reinsurance treaty commutations, prior-year development and surety losses.

The underlying business performance of P&C operations was very healthy, with consistent improvement in several key operating indicators. Significant progress was made on finite treaty commutations, expense reduction, balance sheet strengthening and a reserve addition that reflects what we believe should fully resolve our surety-related obligations to a large national contractor.

We have acted to correct our prior accounting for businesses reported as discontinued operations. The state exam was successfully concluded.

Most impomrtantly, the 2006 outlook is positive.

Now I'd like to give you a bit more detail on the financials before turning it over to Jim.

Today we reported a net operating loss from continuing operations for the fourth quarter of $172 million or $0.74 per share versus net operating income of $200 million or $0.72 per share in the prior year period. The net loss for the quarter, which includes the impact of discontinued operations, as well as realized investment gains and losses, was $217 million or a loss of $0.92 per share compared to a net income of $303 or $1.11 a share in the prior year period. You will recall these per share amounts exclude the impact of undeclared deferred stock dividends.

As I said above, the net results include the impact of the disc ops restatement, which consists of net income from discontinued operations of $9 million and $21 million for the quarter and full year of 2005 and net losses of $1 million and $21 million for the quarter and full year of 2004.

Significant commutations and catastrophes reduced operating income for the quarter by $223 million and $37 million, respectively. Prior year development, apart from the commutations and the surety losses, reduced operating income by an additional $139 million and $41 million, respectively.

Property and casualty operations was adversely affected by the same items, resulting in a $30 million net operating loss for the quarter, compared to $170 million net operting income in the prior year period. Pages 15 through 18 of the financial supplement provide detail on the impact of commutations and catastrophes on the property/casualty segment.

As I said, we finalized a number of finite reinsurance re commutations this quarter, the most significant of which is the three-year corporate aggregate treaty. These commutations include all finite treaty obligations with Hanover and Scan Re.

We view these commutations very positively. The commutations will improve earnings and balance sheet transparency. They were negotiated on favorable economic terms, with CNA receiving significant cash payments. We eliminated greater than 50% of the funds withheld, reinsurance recoverables and future interest payment balances.

We estimate that the commutations will reduce interest expense by $84 million in 2006 and $65 million in 2007. This will have the effect of boosting our after-tax earnings by $55 million and $42 million, respectively.

I should also mention that these commutations will make it very difficult for those of you who like to review Schedule P. As we have said before, the changes that have taken place in our reinsurance program over the last several years, as well as other factors, have made it difficult to reach meaningful conclusions from Schedule P. In particular, the commutations will significantly increase development and reduce paid losses.

Regarding our Wilma losses, our gross and net losses were $132 million and $46 million, respectively, for the fourth quarter, resulting in an after-tax loss on Wilma of $33 million. Much of the reduction of our gross loss here reflects the positive impact of the multi-event aggregate treaty I mentioned in last quarter's call. This treaty purchase proved to be very timely. It not only reduced our net loss from Wilma, but also continues to buffer any impact from Rita gross loss estimate changes.

As for Katrina and Rita, our prior net loss estimates are holding, although I would point out to you that we still view our Katrina outcomes cautiously because of the unusual aspects of that storm.

For 2006 we renewed our corporate property cat treaties-- excuse me, our corporate property cat treaty with an additional $200 million in limits purchased. So we're purchasing now $700 instead of $500 and no change in our retention, which is $200 million. But we did take some additional co-participations at the low treaty levels. The multi-event aggregate treaty renewed with modest changes in terms.

As importantly, our cost for the two property cat treaties for 2006 will increase significantly. In 2005 our property cat reinsurance costs, before reinstatements, were approximately $25 million. Our costs in 2006 more than doubled, before you consider the cost of the additional excess layer.

Adverse prior year development, apart from the commutations had a $139 million after-tax impact on the fourth quarter. There were three main drivers of this adverse development. Those were pollution, assumed reinsurance and excess worker's comp.

A majority of our adverse development was reflected in our corporate segment,w here we added $50 million, pretax, to our pollution reserves. This had a $33 million after-tax impact. The remainder, which is approximately $100 million pretax, was driven by reserve additions to our assumed reinsurance business now in run-off. We also added to reserves in our P&C operations standard lines segment to reflect worsening results in our excess worker's comp book.

The other key issue I want to address is the surety losses related to the large national contractor. As promised in the second quarter when we put up an initial reserve, CNA Surety completed a review of the contractor's operations and in connection with the contractor's revised restructuring plan, CNA Surety established a projected ultimate loss of $110 million versus the original $40 million initial estimate. This estimate was prepared with a view to fully resolve our obligations here.

Moving on to our other major business segments, the life and group non-core segment reported a net operating loss of $22 million for the quarter compared to a net loss of $9 million in the prior year quarter. The primary drivers of the decline were reduced fee income and unfavorable results in individual long-term care.

The corporate and other non-core segment reported a net operating loss of $120 million compared to a net operating income of $39 million in the prior period. the decline is primarily due to the previously mentioned adverse prior year development and the impact of commutation.

Pretax net investment income for the quarter was $547 million, up significantly from the prior year period's $464 million. The increase was due primarily to reduced interest expense on funds withheld and other deposits. We also benefited from a larger invested asset base and improved short-term yields.

It's important to remember that this improvement is net of-- is net of a $75 million decrease in income from the trading portfolio, which was largely offset by a corresponding decrease in policyholder funds liability supported by that portfolio. After-tax realized investment losses for the quarter were $54 million compared to realized gains of $104 million in the prior year period.

Turning to our expense management efforts, we exceeded our previously established goal of further reducing expenses in our ongoing operations by $100 million this year. This is in addition to last year's $100 million reduction. The P&C ops expense ratio for the quarter and the year were 30.4% and 30.5%, respectively, versus 30.3% and 32.1% in the prior periods. While still not where we want to be, the progress is encouraging as we continue to challenge our expense structure.

With that, I'll turn it over to Jim.

Thanks, Craig, and good morning, everyone. I would like to focus on our core operating indicators for the fourth quarter and the year. From this perspective, what you see is a year of normalized operations and solid fundamentals. The property and casualty operation is well positioned to compete successfully and grow rationally in our target markets.

Let's start with premiums. Gross written premiums were virtually flat at $2.2 billion in the fourth quarter and up about 2% to $8.9 billion for the year. On a net written premium basis, premiums were down about 2% for the quarter and the year to $1.7 billion and $6.8 billion, respectively.

Standard lines gross written premiums were essentially flat for the quarter and the year, while specialty was flat for the quarter and up 4% for the year. On a net basis, standard was down 3% for the quarter and down 4% for the year, while specialty was essentially flat for the quarter and up 3% for the year.

Overall, we are comfortable with our business volume. We have a diverse portfolio and we grow and shrink selective as opportunities present themselves. The key, though, is that we continue to focus on the bottom line, not the top.

Now let's look at rates. For P&C operation as a whole, average rates were flat for the fourth quarter and flat for the year. In standard lines, average rates were flat in the fourth quarter, while specialty lines continued to achieve modest rate increases.

I am very encouraged by our rate indicators. The fact that we're holding the line on rates and improving retention, which I'll get to in a minute, speaks volumes about our underwriting discipline. It also demonstrates the ability of our underwriters and agents to sell the value of doing business with CNA.

One other comment about rates. CNA's rate environment is, in fact, multiple rate environments, some more favorable than others, depending on the line and the territory. Our branch and regional structure positions us to respond to these differences flexibly, appropriately and profitably.

Turning to retention, we finished an up year on a strong note. P&C operations retention in the fourth quarter was approximately 83%, our third consecutive quarter at about 80% or better.

For the year, retentions averaged 80% versus 73% for 2004. Fourth quarter retention in standard lines was 81%. Specialty lines ran at a very strong 87%.

Until this year, our retention levels have not been as strong as our competitors. We were building a more profitable, less volatile book of business and that entails several major underwriting initiatives. This work is behind us now and our retention has rebounded accordingly. In short, we've worked hard to build a more profitable book of business and now we are succeeding in holding our book together.

Now let's turn to new business. We wrote approximately $335 million of new business in the fourth quarter and $1.5 billion for the year. This represents 19% of total production for the quarter and 21% for the year. We view this as an appropriate level in the current rate environment.

For the quarter and the year, new business production was heavily driven by our cross-sell strategy. Cross-sell is the sale of additional products to existing customers.

New cross-sell premiums amounted to $142 million in the fourth quarter or approximately 42% of new business. For the year, cross-sell premiums amounted to $586 million or approximately 39% of new business. This compares to $350 million of cross-sell business in 2004 or 22% of new business.

The pickup in our core cross-sell is encouraging for several reasons. Cross-sell enables us to leverage our distribution and customer relationships. It helps protect us from adverse selection and, going forward there's much more cross-sell opportunity embedded in our specialty and standard lines books of business.

Having said all of that, cross-sell is only one piece of a controlled selective new business strategy. We track new business quality by monitoring the spread between paid and case loss ratios for new business and renewals. We also monitor the spread between new versus renewal pricing. Indicators like this allow us to take a very disciplined approach to adjusting our new business appetite.

Net loss ratio -- our fourth quarter 2005 net calendar year loss ratio was 91%. This included 3 points from catastrophe and 17 points from significant commutation. Our full-year loss ratio was 80%, which includes 12 points from and cat and commutation. In addition, adverse loss development added 3 points to the P&C operations fourth quarter loss ratio. The surety losses added 4 %.

Turning to accident-year loss ratios, you start to see the quality of current year performance in recent years. The P&C operations net accident-year loss ratio was approximately 72% in 2005 versus 62% for 2004. These ratios include catastrophe losses, 8 points for 2005, 4 points for 2004.

In standard lines, the 2005 net accident-year loss ratio was approximately 76% while specialty lines came in at about 63%. All these accident-year loss ratios are evaluated as of the fourth quarter of '05.

Finally, combined ratio -- for the fourth quarter, property and casualty operations came in at approximately 121%. This includes 3 points from cat, 17 points from significant commutations and 4 points from surety losses. The full-year combined ratio was 110%. Before cats and commutations, this ratio came in at approximately 98%. Not an end state by any means, but a clear reflection of our focus on more profitable underwriting.

The standard lines fourth quarter combined ratio was 136%. Cats, commutations and prior year development added 36 points.

Specialty lines fourth quarter combined ratio was 97%, including 15 points from cats, commutations and surety losses. Prior year development benefited the ratio by 2 points.

As Craig mentioned, further details on the '05 and the '04 ratios before and after the impact of cats and significant commutations are presented in the financial supplement.

Before wrapping up, I would like to comment briefly on the outlook for 2006. The January 1st renewals went very well. Our agency relationships are very good as validated by internal and external surveys and we have no significant underwriting issues to distract us from the work of selecting and writing high quality business in our targeted classes and territories -- small business, manufacturing, property, technology and specialty programs, to name a few.

As for the market, it's definitely getting tougher, but, knock on wood, we're not seeing the kind of excessive competition that proved so destructive in the '90s. Overall, then, we like our prospects quite a bit.

In summary, 2005 was a year of solid underwriting and underlying performance. We feel good about the state of our business and we expect to continue our progress in 2006.

Operator, we're now available for our Q&A.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is Jay Cohen, Merrill Lynch.

Yes, I've got a couple of questions. The first is the-- the commutations. You went over the numbers kind of quickly, but I was wondering, the drag with the funds withheld on the investment income, could you give us those numbers again? You said what it was in '05, '06 and '07?

Yes. It's Craig. So what I said was that the change from what would have been is that we reduced '06 by $84 pretax, which has an after-tax impact of $55 on '06.

So that's actually the reduction from '05?

No, that's actually the reduction of what-- we had given you earlier numbers. I think maybe the easiest thing is I think we had earlier given you numbers we can talk about.

Yes, our earlier estimate we had given you for '06 on finite interest expense was $144 million. It's now $60 million. So estimate finite expense in '06 is $60 million and our estimate finite interest expense in '07 is $19 million.

And what was '07?

'07 was $84.

Great. Secondly, the-- you said the standard lines had some adverse developments. Of the $139, can you break that down, what was in standard lines?

This is Mike Fusco, Jay. It was approximately-- pretax it was approximately $80 million of standard lines and I think Craig commented it came primarily from an excess worker's comp book of business.

Okay. And then I guess the last question for now is -- and I apologize. I'm sort of in a hotel room trying to deal with this on my laptop, but can you just give us what the combined ratio for property/casualty operations was excluding the commutation, catastrophes and adverse development?

For the quarter or year to date?

For the quarter.

98.1.

And that includes the surety loss?

No. With the surety loss, it's 94.1 -- or if you exclude it.

Okay. And then the last question, on the investments, and I think this was an issue last quarter, I just forget the explanation, but the investment portfolio has jumped around a little bit. So in the quarter it went down by about $2 billion, mostly in short-term investments. I'm wondering that-- what that relates to.

Yes, Jay. I think we actually changed our supplement based on your question last time, just to show you've got some influence. So if you look at-- if you look at page six in the supplement, what we've done is broken down and give you some-- given you the background on the net-- on the securities lending and the receivable payables net.

So if you take-- actually if you take that noise away, the total book value of investments went up by about $500 million for the quarter, $38 billion to $38.5 billion, and if you compare it to prior year, it's actually up about $1.3 billion, $38.5 against $37.1. And you'll be able to see those numbers and what I'm referring to if you look at page six of the supplement.

Okay, that's great. Thanks a lot.

Our next question, Bob Glasspiegel with Langen McAlenney.

Good morning. Obviously you aren't going to be surprised to say-- to hear that I applaud what you did on the finite. Given that this is something I've been rooting for years-- for a few years, I think there's been a feeling of management that the rating agencies might be more nervous to see reduced book value, which shocks me, because I would think that the higher earnings power in the forward would be-- would be positively viewed. Am I right that the rating agencies were quite comfortable with your actions taken, or was there a different read?

Yes, Bob, this is Steve. The rating-- we met with the rating agencies this week to discuss that and a number of other issues, but they were quite comfortable with the actions we took.

Quite comfortable? I mean, is it a possibility that you could get an upgrade or just a watch taken off?

We've already had two watches-- not watches, we've already had two outlooks taken off and I'm not going to speak for the rating agencies, but we felt very comfortable with our discussions with them and I think they were very positive about the actions that we took.

Okay. Could you amplify the individual long-term hiccup in the quarter?

Yes. Bob, it's pretty-- it's simply related to individual long-term care, just the individual claim volume. Last year in the quarter we had very favorable long-term care. Claim volumes were down significantly and this quarter they were up to a more normal level. So there's nothing unusual going on there.

And, Jim, just your outlook for '06, it seems to me you're saying look for premiums to be flat and decline as you hold the line on pricing, reduced new business, improved retention. Sort of how does the tradeoff on those two march through as we think about '06 top line?

Well, as I look at it, we've done a lot of work over the last three years on improving the profitability of our book. So our key focus is really going to be on retention, now that we've got all the key underwriting initiatives behind us. And you can see that we've seen the improved retention we thought we'd see when we saw the underwriting completed. And so I would expect to see the improved retention.

Our new business flow has been very good if you look back for the year at 21% of our book was new business. It's being heavily driven by cross-sell, so I would expect to see cross-sell playing a key part and that we'll continue to be a factor in the market as long as rates don't deteriorate. And at this point, rates have stabilized. We're not seeing the significant dropoff in rates and we are seeing an uptick in rates from a property perspective. The other lines of business seem to be holding.

So it's a rational marketplace, one we want to compete in and one we will emphasize retaining our book of business and grow where we have the opportunity to grow.

There's no need-- Go ahead, I'm sorry.

That's it.

There's no need to step up a vigorous expense management program in light of reduced volumes?

No. And as-- I think as Craig indicated that we took $100 million out and got our expense ratio down to 30, but that's not the end. We are continually looking at our expense management every year and I think as you look at us for the last three years, we've taken significant expense out of the organization. We will continue to focus that-- on that again this year.

Thank you very much.

Yes, Bob, I just want to add a couple things to Jim's remarks here. With respect to expense initiatives, these will be ongoing, not-- not-- these are ongoing initiatives. This is not special programs or special projects that we have and I think it's very safe to say, with respect to CNA's expense structure, that there's no one significant slug of expense that if we took that out that would-- that would solve any major expense problem.

t's going to be taking-- constantly looking at everything we do, making decisions as to whether we need to do it or not and if we do need to do it and spend the money to see if we can do it quicker, better, faster and cheaper. So it's sort of-- it's a cultural thing and it's a continuation of what we've been doing for the last-- for the last couple of years.

With respect to the marketplace and how CNA's portfolio has responded, number one, I just want to remind you, what has happened here with respect to rate, what has happened here with respect to retention and what has happened here with respect to new business levels is exactly what we told you would happen. We said that we would-- we would sacrifice retention early in order to get the portfolio right, which we did, and we dropped our retention.

I think Jim probably indicated to you, I think we were in the high 60s and at some point in the mid 60s for the standard lines. And we let part of the book-- we let part of the book go in order to get-- get a better portfolio. We took more rate, I think, than the rest of the market and gradually worked our retentions back to where they are today.

So we are looking at a very, very favorable 83% in the fourth quarter. We averaged in somewhere between 79% to 80% for the year. Our expectation is that will continue. That's exactly what we said would happen after-- after we had gone through all of our re-underwriting initiatives.

With respect to new business and price, we-- we have chosen to dial back and we said we would, we would dial back our new business writings to appropriate levels, which where we're at right now at 19% to 20% seems very appropriate. We have hedged that even further by having 40% of our business in 2005 be cross-sell or internals-- selling to internal customers, which we think is an additional way to hedge the volatility of new business and not having to go out and compete as aggressively on price as we might have-- might otherwise have to do.

So I think the-- with expenses, it's a continual effort. We will rationalize our infrastructure to fit-- fit the business. The retention-- pricing, retention and new business levels have-- have responded exactly as we forecasted and, quite frankly, we do have four or five major areas that we will be penetrating for growth in 2006, which will provide, also, an offset to market conditions and those are our small business initiative -- Jim's talked to you about that before. We've got a technology business that's-- that's emerging. Our entire specialty platform, which is a market leader and has excellent results, has got a lot of legs and we expect to see growth in that area. And, quite frankly, our property book is another area particularly on the larger side, that we would expect to see growth in in 2006.

So we've got growth areas and some opportunity, a good distribution platform and I think a portfolio that will allow us to grow-- grow nicely on top of it.

Thank you for the thoughtful answer, Steve.

Okay.

Our next question, Tom Cholnoky with Goldman Sachs.

Yes, good morning. Just a couple of questions, if I can. On investment income, just so I fully understand this, if I look at the $311 million that you reported in the fourth quarter of '05 for your P&C operation, what would that number be-- or has that already incorporated the savings on the commutations? Or what would that number be if what you did was not there in the fourth quarter? Do you understand what I'm saying?

I'm not sure. Are you asking what the--?

In other words, you gave us what you're going to save on the commutations in '06 and '07.

Right.

On the funds withheld interest. If that commutation had taken place at the end of the third quarter, what would you have reported in investment income for the fourth quarter of '05?

Well, let me just-- so the-- I would tell you, the investment income impact of the decrease in the fourth quarter was $27 million.

So the $311 million-- so you-- does that mean that you commuted this-- this commutation took place in the beginning of the fourth quarter?

Yes.

So that $311 reflects the entire impact of the commutation?

That's correct.

Okay. That was the question.

You mentioned something about a decrease in bad debt and I was just wondering what-- was that factored in to any of those numbers or did you quantify that at all?

What I was saying was that when the commutations themselves, the impact of the commutations, the $223 after tax, included a-- we had some bed debt up against one of the contracts. So it just lessened--

Oh, you netted that out in the charts?

That's exactly right. It was a minor-- it was a minor amount.

Okay, that's fine. Do you have a cash flow number of what you had for the fourth quarter and for the full year?

No, I don't, but we'll be giving-- we will be updating that when we file the K here in a few weeks.

Okay. And then I guess the last question, asbestos. Any thoughts there as to any changes there or any comments that you can give us, some updates on how you feel with your asbestos reserves?

We feel good. This is Jon Cantor. Can you hear me?

Yes.

That mike works funny. Well, I would say first of all, we did our annual study, very rigorous methodology. We didn't do any sampling. It's a true ground-up study and we are comfortable that the reserve's appropriate. We feel good about the political reform. We feel good about the fact that these fraudulent claims are being squeezed out of the system. We feel good that the mass screening operations are being shut down.

The claim trends are good for us. Our frequency is down now. We feel good that some of these hellholes like Mississippi and Madison County are getting cleaned up, which isn't to say that there isn't risk left here and-- but the amount of-- the amount of progress that was made in 2005 was very impressive. So I would say right now we're on a good trajectory in asbestos.

And are any of your contracts subject to the Lloyd's wording that's been an issue with some other companies?

You're talking about the Hartford Reinsurance situation?

Correct.

Yes. No, we don't have those issues at all.

Do not. Okay. All right, great. Thank you.

You're welcome.

Our next question, Charlie Gates, Credit Suisse First Boston.

Hi. I only got one question. The one question is, I believe, Steve, yours and Jim's employment agreements used to go through December 31, '05.

Yep.

How have they been changed, sir?

They renewed on January 1st for three years for both us.

Okay. So now it goes to '08?

Yeah.

Thank you very much.

And we'll be filing the details on that-- you'll see them in the proxy next month.

Cool.

We'll go next to Bill Wilt, Morgan Stanley.

Hi. Good morning. Any notable changes in your approach to underwriting primary commercial property business? I guess you mentioned an area of growth, potentially large commercial. But both-- both in terms of rate and your ability to, maybe, pass on the higher reinsurance costs, so maybe as-- or, more importantly, the fundamental approach, any changes in the underlying policies, exclusionary language that would in response to the storms or the higher reinsurance costs?

I think property has been a very profitable line for us. This is Jim Lewis. We still see this as a growth area. We started to see the potential to get the rate increases on that book in October, November, December timeframe. We expect that to continue this year throughout the year from a property perspective.

I think as we look at cat management, which we had been doing for the last three years along the coast, I think it's prudent on our part, and I think you'll probably see the industry doing the same things, to take a closer look at the total aggregation of exposures. And so we will be taking a look at the total aggregation of exposures, but at the same time, as we look at some of the cat-prone areas, we have a wholesale property unit that we added in the early part of last year and that unit will still be looking to write business on an opportunistic basis in the coastal areas. So if we manage exposures, we're also being very opportunistic at the same time.

That's helpful.

Let me-- this is Steve. Let me-- a couple of-- a couple things I'd like to add to Jim's remarks. First, your observations regarding reinsurance costs are exactly spot on. I mean our costs, as have most of the-- most of our competitors have gone up substantially. Our cat coverage renewed January 1st, by the way, and were put to bed prior to that.

But in the large property market, which we do see as-- or larger property market, which we do see as an area of opportunity for us, there is much, much more freedom of form and rate. You do not get into the issues that the small and middle market runs into with respect to the controls, the regulatory controls on the issues of subsidization that are raised by states that are not, maybe, so heavily cat exposed. We're able to negotiate much, much more aggressively with respect to deductibles, occurrence limitations, the actual costs, whether it's reinsurance or acquisition, loss cost, claim service and the like becomes much, much more tailored to your actual physical costs rather than average-- actual costs rather than average costing. And the customers are used to buying. I mean, that's what-- they're very much used to doing that.

And it's a game that also-- it has some volatility to it, but the returns are much greater than we would perceive to be in the small to-- in the small to middle area. So we like the business. We think we do it pretty well and we're going to do some of it opportunistically in cat-prone areas, as Jim mentioned, and, in general, we see it as a good place for us to be, going forward.

That's helpful. Thanks. Is it fair to say that the large commercial-- let's see, large commercial policyholders, property policyholders are going to be getting less coverage in 2006 than 2005?

They can buy all they want. It's a question of money. We're happy to supply it. I mean, I think that market is much, much sensitive to events like Katrina than, perhaps, the small and middle market, because of the regulatory effect on the small and middle market.

Sure. Makes sense. Thanks for the answers.

Yep.

[OPERATOR INSTRUCTIONS] We'll go next to Scott Frost, HSBC.

Hi. Just to go over the commutations, is-- the commutations are of the funds withheld reinsurance agreements that you talk about in the Q3 10-Q, among other places. Is that correct?

Yes.

And the agencies are aware of all this. This is not new news to them. If I said that, that would be accurate, is that right?

That's correct.

Okay, thank you.

We'll go to a follow-up from Jay Cohen, Merrill Lynch.

Yes, you had mentioned that you got a decent amount of cash from the commutations. What was that number?

I don't think we really want to give it to you specifically, but it was pretty significant.

But it's in the year-end balance sheet you show, anyway?

Yes. Well, I'll tell you-- Let me rephrase this. If you look at-- I will tell you that our-- I told you before that our invested asset balances, in terms of book value, went up about $1.3 billion, $1.4 billion over the course of the year. About $500 million of that increase for the full year -- and you'll remember, we also commuted a big treaty with National Indemnity in the second quarter -- so $500 million of the increase in cash came from commutations.

Great. That's helpful. Thanks, Craig.

We'll return to Tom Cholnoky with Goldman Sachs.

Sorry. Just one other quick question. I think in prior calls you've given us some guidance on how we should think about the life and group area and, given the loss in the fourth quarter, how should we think about that in '06?

Actually, Tom, I think I've tried to avoid giving you any guidance on where we are-- we were headed there, but I think that-- I mean, the guidance I've given is that-- that it does tend to bounce around in a range from about where it was this quarter and I think that's-- I'd say in that same kind of-- this quarter's range is about what you ought to expect going forward.

So it's going to be a pickup then?

Well, not exactly.

Well, you lost $109 million in the-- for all of '05, right? And you were at minus $43 this quarter?

No.

No?

I said, well, at the group-- you talking about the corporate segment, too?

No, just life and group.

Then we lost $22 for the quarter.

Oh, $22? Okay. Sorry.

That's-- so we've kind of bounced around in that from a small gain to numbers in between small gains and a loss of $22. So I think that's about the range to be thinking of.

Okay. Okay, sorry. My error.

We'll go next to [Amanda Lina], Goldman Sachs.

One quick question. You said that the state exam had been concluded. In the past, I think you said the regulators were taking their own look at reserves. Are the results of their reserve review included in today's results?

I mean, they took at reserves and they concluded that where we had placed them were reasonable. So there's no-- there was no impact-- no impact coming out of the state exam on our reserves.

Great. Thank you.

Our next question, Gary Ransom, Fox-Pitt, Kelton.

Yes, I just had one question. On reserve development, you talked about the adverse development, but it appears that there was a fair amount of favorable development from the '04 accident year and I was wondering whether you could tell us what classes or lines the favorable development was coming from?

Sure. This is Mike Fusco. Where you would expect it to come from, generally short-tail lines. Certainly from property, from claims-made programs in HealthPro and-- which is primarily nursing homes, things like that.

Do you have any early read on some of your longer-tail lines for more recent accident years? Are they, at least initially, starting to develop in a way that might give you an indication of which way they might go in the future?

That's kind of an open-ended question you're asking there. We certainly--

I love open-ended questions.

We certainly look at all of our lines and we're comfortable with our-- for recent accident years we're very comfortable with our '05 accident year across the board -- standard, specialty, across the board.

I guess-- maybe I'm trying to ask the question whether, as you look back on what you've written, what was more or less during the hard market, some of these longer-tail lines might have terms and conditions that are tighter than what the experience might be, just from, say, the late '90s.

Yes, this is-- let me take a shot at that. I mean, first off, if we say anything that was worse than what we had expected, we would have recognized it, because that's what our pattern has been. If it's looked as if it were-- being-- that it were better, frankly, from our perspective it'd be much, much too early to declare victory and I don't think anything other than sort of an enthusiastic healing would be appropriate.

So I think it's way too soon to say anything other than we feel comfortable with where we're at right now. We don't see anything on the adverse side that would take us down a different path and we're going to wait and see.

All right. Thank you very much.

We'll return to Bob Glasspiegel, Langen McAlenney.

Given that you've gone after some low-bearing fruit with the commutation as far as trying to improve--

That's low-bearing?

Hey, Bob, you ought to try it from this side.

No, no, no. I'm sure you had to jump through 8000 hoops to execute it and, again, congratulations on that. But it seems to me there might be some more low-bearing fruit to look at with respect to your preferred with your parent. You've got sort of an expensive-- expensive, non-cash element but building-- building future payment that you got to make. Is there any thought to maybe trying to renegotiate the-- that rate with the parent? I mean, they're not getting any cash on this. Maybe they'd be receptive to changing the structure.

Yes, we haven't-- we don't have any plans right now, Bob. I mean, and we talked before about capital management. I think I've said-- I think I've said publicly that we look at the commutations like the first bet towards developing a longer-term capital management, more rational capital structure and certainly the-- the preferred would fit into our thought process as we're moving forward. But we don't have any current plans. But you've certainly hit on something that would-- would be up there on a list of things we need to consider going forward.

Was there something in between those two items that we should be thinking about that's lower-bearing fruit than the preferred?

No. It's just we would-- instead of doing one step at a time-- you know that we have debt that's coming due in the fourth quarter, small amounts like $250. And when I say that, it's just more a matter of anything we do will be done with a view towards the comprehensive whole. So we're not going to do things one piece at a time and whatever we do in a kind of comprehensive evaluation of what the capital structure would be would certainly include dealing with the preferred. That's all.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS] We'll go next to Seth Glasser, Barclays Capital.

Yes, good morning. Can you address the issue of asbestos reserve adequacy? Were there any reviews completed or actuarial assumptions changed in Q4? Perhaps I was misguided, but I expected to hear more on that issue with these fourth quarter results.

This is Jon again. I don't know, were you on the call when I answered the original question about this?

I may have dropped off and I apologize about that.

All right. Why don't you call us back and we'll give you the answer again off--

Sure. Not a problem. Thank you.

And we'll go next to Jay Cohen, Merrill Lynch.

Yes, I was just looking in the specialty lines business, the overhead expense ratio, it looks like it dropped pretty significantly from the first three quarters and I'm wondering if there's anything unusual in there?

No, not that I'm aware of, Jay.

No, nothing unusual that we're aware of.

Okay.

I mean-- the-- let's step back, because I think we've got-- we should probably-- Remember sometimes with the specialty lines operating expenses, they're affected by-- I was starting to say something about the-- we've changed around some numbers with CNA National, the warranty business. But I don't think it has any impact. I don't think there's anything unusual there. Sorry to be fumbling.

No, that's okay. Thanks.

Any other questions, operator?

I have no other questions holding.

Okay. Well, if that's the case, I guess we'd like to thank you for your participation today and remind you that there are dial-in numbers for following up on this call and thanks for-- thanks for joining us this morning. Thank you, operator.

Once again, I call your attention to the disclosures concerning forward-looking statements in the earnings release and, as previously stated at the start of today's call.

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